This is the weekly Merger Arbitrage Performance Review – June 28, 2020. This report focusses on IOTS, TECD, ADSW & RRGB arbitrage spreads during the period 22nd June – 26th June. These stocks are selected from the top 20 investable US cash based merger spreads, a list of the largest pending cash merger arbitrage spreads available as at 21st June compiled by Merger Arbitrage Limited. Investors and traders can follow our latest Top 20 (T20) list each week here. Regular followers will already be familiar with our rules for inclusion on the T20 Index.
Following the performance table of investment returns, the first section of this report compares and reviews the performance of the broader market with the MNA. Then we more specifically discuss the performance of the overall T20 Index. The next sections detail the biggest winners & losers from the T20 portfolio followed by the conclusion. The information contained in this weekly Merger Arbitrage Performance Review – June 28, 2020 assists traders in making merger arbitrage investments and event driven trading decisions. Click this link for the archive of spread performance reviews from previous weeks.
Additional live news updates for these deals can be found on our customized T20 Index news feed. Even more specific merger details & news can be found on the dedicated news and merger factsheet pages including popular deals such as CLGX, TKAYF & GRUB, TECD & TIF.
Table of Returns
Merger Arbitrage Performance Review - June 28, 2020
| Merger Arbitrage Limited | The Market | ||
|---|---|---|---|
| Product | Weekly Change | Product | Weekly Change |
| T20 Index | (0.89)% | SPY | (2.77)% |
| Index Dispersion | 3.96% | VIX | (1.11)% |
| Winners | 8 | MNA | 0.55% |
| Losers | 10 | ||
Market Performance Review
The broader market started the week brightly and looked set to extend the rally from the March lows. This came to an abrupt halt on Wednesday as the IMF downgraded its economic forecasts for 2020 and 2021. IMF Chief Economist Gita Gopinath cited her primary concern is “not being able to contain the virus”. The report forecasts US growth of -8.0% in 2020, a notable downgrade from its April forecast of -5.9%. Despite a brief rally late on Thursday, the market continued to slide during the week. By the close on Friday, the SPDR S&P 500 ETF (SPY) index fund was firmly in the red finishing lower by 2.77%.
The VIX however surprisingly only suffered marginally during the same period. By Friday, the index had fallen by 1.11%.
The IQ Merger Arbitrage ETF (MNA) in contrast managed to finish in positive territory for the week. This performance came despite the negative performance of TD Ameritrade (AMTD). The performance suggests the short instruments used in the “hedging” methodology which are not necessarily involved in the actual deal itself may have benefitted from the broader market decline. By the close on Friday, the IQ Merger Arbitrage ETF was up 0.55%, identical to the previous week.
We continue to repeat the following section from our previous analysis
It is important for traders of merger arbitrage to consider how each of their individual positions will be affected by a continued spread of the coronavirus.
- How can this affect the granting of regulatory approval in China?
- Are delays inevitable?
- Will a slowdown in the global economy lead acquirers to rethink their acquisition strategy?
- Are individual merger arbitrage stocks still supported by higher floor prices now that the market kas moved lower?
Merger Arbitrage Portfolio Performance Review
Cash merger arbitrage spreads widened marginally this week reversing last week’s gentle narrowing of average spreads. Deals continues to close, for example AXE, and despite constant rumors surrounding existing deals such as TIF, deals move towards successful completion. One bright spark in the merger arbitrage space was the announcement of an (initially) hostile approach by Cannae Holdings (CNNE) for CoreLogic (CLGX). Readers are advised to check our dedicated deal page to stay abreast of developments in this deal.
The T20 index closed down for the week by 0.89% with RRGB providing the majority of this loss. The index was comprised of an incomplete complement of 18 merger arbitrage cash deals and 2 cash positions. The losers beat the winners by a margin of 10 to 8 with 0 non-movers. The standard deviation of the individual index returns returned to normal levels despite the disparity of returns from the extreme movers in the index. This week’s figure was recorded as 3.96%. This puts the number inline with the short term average and marginally below the medium term average figure.
Merger Arbitrage Performance Review - June 28, 2020
Adesto Technologies (IOTS)
Adesto Technologies started the week off on the right foot and gave all merger arbitrageurs something to cheer about (with the exception of those that were short of course). An announcement dated June 22 informed the market that the company which is the subject of a takeover from Dialog Semiconductor plc (XETRA:DLG)
have been informed by the Committee on Foreign Investment in the United States (CFIUS) that CFIUS has completed its review of the pending acquisition and determined that there are no unresolved national security concerns with respect to the proposed transaction.
The news moved the stock significantly higher to almost touch the offer price from Dialog. A level at which it sat for the rest of the week. The announcement went on to say
The parties expect the transaction to close on June 29, 2020, subject to customary closing conditions.
Investors cheered the news and sent the stock up 3.55%. By Friday’s close, the stock was up $0.43 at $12.54. The simple spread is now just 0.08%. In our previous review we had originally penciled in a 3-4 month closing timeline before clearance would be obtained for this deal. The fact that clearance came in two months following our analysis bodes well for the process of merger arbitrage. This demonstrates CFIUS is able to fulfill its functions despite the pandemic and that (currently) political issues have been put aside. However, as existing deals continue to move towards their end games they are not being replaced in sufficient quantities by new deal announcements.
Tech Data Corporation (TECD)
Tech Data Corporation retains its place in the larger movers this week and yet again displays another strong performance. Tuesday morning saw the announcement of the list of replacement stocks moving into the S&P SmallCap 600 thus signaling the certainty with which the TECD deal will close successfully. According to the same Cision PR Newswire press release, the deal is
expected to be completed on or around June 30 pending final conditions
We had commented last week this deal appeared to be making great strides towards a successful consummation and now that point has been confirmed. This highlights how traders need to be able to interpret market movements in a target stock which are uncorrelated and significant relative to the broader market. Volume can be a key indicator in this instance especially when no apparent news is forthcoming. We encourage traders to familiarize themselves with the various stakeholders in deals such as this for example the Australian Foreign Investment Review Board. By Friday, the stock finished the week up $1.62 at $144.61, a rise of 1.13%. The simple spread now at 0.27%.
Advanced Disposal Services (ADSW)
Advanced Disposal Services (ADSW) is a deal which has now been live for over a year but receives limited coverage. Although last week we did comment on the decline recently experienced in this stock. Our conclusion wasWe had previously cautioned investors as to the timeframe for this deal, analysis which now proves justified. We currently believe that although we think this deal will consummate successfully, the spread is not commensurate with the risk involved.During the week we learnt the full reason for the recent decline in the stock as target and acquirer, Waste Management announced the revised terms of the deal. The firm is now the subject of an all cash friendly takeover bid of $30.30 from Waste Management (WM). The deal remains subject to the asset disposal as stipulated by the DoJ. This caused the stock to decline during the week by $1.00 to $30.15.
